UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)
5270 Neil Road, Reno, Nevada 89502
(Address of principal executive offices)
(702) 686-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 8, 1995
Common Stock, 129,086,628
par value $.000625 per share
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
FORM 10-Q
The accompanying consolidated financial statements have been prepared
by the Company, without audit, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results
for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the "SEC"),
but omit certain information and footnote disclosures necessary to present
the statements in accordance with generally accepted accounting principles.
These financial statements should be read in conjunction with the
financial statements, accounting policies and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1994. Management believes that the disclosures are adequate to make
the information presented herein not misleading.
Organization
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity, IGT, and
facilitate the Company's initial public offering. In addition to the
Company's 100% ownership of IGT, each of the following corporations is a
direct or indirect wholly-owned subsidiary of the Company: IGT-Australia,
Pty. Ltd. ("IGT-Australia"); IGT-Europe b.v. ("IGT-Europe"); IGT-Iceland
Ltd. ("IGT-Iceland"); and IGT-Japan k.k. ("IGT-Japan").
IGT is the largest manufacturer of computerized casino gaming products
and proprietary systems in the world. The Company believes it manufactures
the broadest range of microprocessor-based gaming machines available. The
Company also develops and manufactures "SMART" systems which monitor slot
machine play and track player activity. In addition to gaming product
sales and leases, the Company has developed and sells computerized linked
proprietary systems to monitor video gaming terminals and has developed
specialized video gaming terminals for lotteries and other applications.
IGT also develops and operates proprietary software linked progressive
systems. The Company derives revenues related to the operations of these
systems as well as collects license and franchise fees for the use of the
systems.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
IGT-International was established in September 1993 to oversee all
operations outside of North America by the Company's foreign subsidiaries.
In January 1995, IGT-International was merged into IGT (formerly named IGT-
North America).
IGT-Australia, located in Sydney, Australia, manufactures
microprocessor-based gaming products and proprietary systems, and performs
engineering, manufacturing, sales and marketing and distribution operations
for the Australian markets as well as other gaming jurisdictions in the
Southern Hemisphere and Pacific Rim.
IGT-Europe was established in The Netherlands in February 1992 to
distribute and market gaming products in Eastern and Western Europe and
Africa. Prior to providing direct sales, the Company sold its products in
these markets through a distributor.
IGT-Iceland was established in September 1993 to provide system
software, machines, equipment and technical assistance to support Iceland's
video lottery operations.
IGT-Japan was established in July 1990, and in November 1992 opened an
office in Tokyo, Japan. On April 16, 1993, IGT-Japan was approved to
supply Pachisuro gaming machines to the Japanese market.
Unless the context indicates otherwise, references to "International
Game Technology", "IGT", or the "Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries. The
principal executive offices of the Company are located at 5270 Neil Road,
Reno, Nevada 89502; its telephone number is (702) 686-1200.
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except THREE MONTHS ENDED NINE MONTHS ENDED
per share amounts) June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 97,294 $146,881 $313,223 $387,325
Gaming operations 53,481 40,801 146,757 114,660
Total revenues 150,775 187,682 459,980 501,985
COSTS AND EXPENSES:
Cost of product sales 54,097 77,016 177,454 204,174
Gaming operations 26,670 17,678 68,320 51,089
Selling, general and
administrative 19,619 18,773 63,824 58,610
Depreciation and amortization 7,091 5,122 20,212 14,367
Research and development 7,063 6,144 21,358 15,282
Provision for bad debts 1,835 1,291 5,448 6,098
Total costs and expenses 116,375 126,024 356,616 349,620
INCOME FROM OPERATIONS 34,400 61,658 103,364 152,365
OTHER INCOME (EXPENSE):
Interest income 10,190 7,223 28,739 21,061
Interest expense ( 4,825) ( 2,794) ( 15,221) ( 8,548)
Gain (loss) on the sale of assets 292 ( 1,987) ( 890) 101
Other ( 464) 455 ( 326) ( 416)
Other income, net 5,193 2,897 12,302 12,198
INCOME BEFORE INCOME TAXES 39,593 64,555 115,666 164,563
PROVISION FOR INCOME TAXES 14,236 24,650 41,622 62,853
NET INCOME $ 25,357 $ 39,905 $74,044 $101,710
PRIMARY EARNINGS PER SHARE $ 0.20 $ 0.30 $ 0.56 $ 0.78
FULLY DILUTED EARNINGS PER SHARE $ 0.20 $ 0.30 $ 0.56 $ 0.76
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 129,962 132,154 131,703 130,596
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING
FULL DILUTION 129,996 136,481 131,703 136,582
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1995 1994
(Dollars in thousands) (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $216,704 $142,730
Short-term investments, lower of cost
or market 41,326 60,320
Accounts receivable, net of allowances
for doubtful accounts of $5,566
and $3,956 112,770 129,796
Current maturities of long-term notes
and contracts receivable, net of
allowances 77,496 81,007
Inventories, net of allowances for
obsolescence of $14,372 and $13,864:
Raw materials 40,852 59,498
Work-in-process 6,632 3,604
Finished goods 27,826 40,908
Total inventories 75,310 104,010
Deferred income taxes 27,784 19,615
Investments to fund liabilities
to jackpot winners 18,193 15,105
Prepaid expenses and other 2,919 6,507
Total current assets 572,502 559,090
LONG-TERM NOTES AND CONTRACTS RECEIVABLE,
net of allowances and current maturities 50,526 61,212
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 13,500 13,691
Buildings 13,656 13,344
Gaming operations equipment 66,873 60,785
Manufacturing machinery and equipment 62,707 59,227
Leasehold improvements 12,280 9,393
Construction in Progress 9,814 -
Total 178,830 156,440
Less accumulated depreciation
and amortization ( 71,222) ( 59,195)
Property, plant and equipment, net 107,608 97,245
INVESTMENTS TO FUND LIABILITIES
TO JACKPOT WINNERS 156,017 131,036
OTHER ASSETS 30,990 19,425
Total Assets $917,643 $868,008
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1995 1994
(Dollars in thousands) (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term notes
payable and capital lease obligations $ 2,324 $ 2,613
Accounts payable 22,140 20,890
Jackpot liabilities 22,165 18,562
Accrued employee benefit plan liabilities 8,190 17,509
Accrued dividends payable 3,869 3,971
Accrued vacation liability 5,823 4,542
Other accrued liabilities 15,381 10,305
Total current liabilities 79,892 78,392
LONG-TERM NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current maturities 111,846 111,468
LONG-TERM JACKPOT LIABILITIES 190,966 146,640
DEFERRED INCOME TAXES 318 10,618
OTHER LIABILITIES 20 22
Total liabilities 383,042 347,140
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.000625 par value;
320,000,000 shares authorized;
149,842,052 and 149,465,774 shares issued 94 93
Additional paid-in capital 230,302 226,712
Retained earnings 447,965 385,511
Treasury stock; 20,868,046 and
17,098,646 shares at cost (137,731) ( 87,160)
Unrealized loss on investments ( 6,029) ( 4,288)
Total stockholders' equity 534,601 520,868
Total liabilities and
stockholders' equity $917,643 $868,008
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(Dollars in thousands) JUNE 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 74,044 $101,710
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 20,212 14,367
Amortization of long-term debt
discount and offering costs - 545
Provision for bad debts 5,448 6,098
Provision for inventory obsolescence 5,564 6,250
(Gain) loss on sale of assets 890 ( 101)
Donated common stock - 500
(Increase) decrease in assets:
Receivables 25,988 ( 84,232)
Inventories 22,703 ( 45,066)
Prepaid expenses and other ( 684) ( 651)
Other assets ( 229) ( 6,503)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities ( 3,778) ( 4,129)
Accrued and deferred income taxes payable,
net of tax benefit of stock option and
purchase plans (24,837) ( 5,491)
Other ( 102) 422
Total adjustments 51,175 (117,991)
Net cash provided by (used in)
operating activities 125,219 ( 16,281)
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from previous page)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(Dollars in thousands) JUNE 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant
and equipment ($35,671) ($38,823)
Proceeds from sale of property,
plant and equipment 4,964 3,153
Purchase of short term investments (213,516) (110,064)
Proceeds from sale of
short term investments 232,646 140,012
Proceeds from investments to fund
liabilities to jackpot winners 15,000 11,964
Purchase of investments to fund
liabilities to jackpot winners ( 43,069) ( 49,703)
Net cash used in investing activities ( 39,646) ( 43,461)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt ( 348) ( 331)
Proceeds of long-term debt 825 46,000
Payments on liabilities to jackpot winners ( 15,000) ( 11,964)
Collections from systems to fund
liabilities to jackpot winners 63,379 43,424
Proceeds from stock options exercised 1,084 745
Payments of cash dividends ( 11,756) ( 11,525)
Payments to purchase treasury stock ( 50,571) ( 57,097)
Proceeds from employee stock purchase plan 958 1,034
Net cash provided by (used in)
financing activities ( 11,429) 10,286
EFFECT OF EXCHANGE RATE CHANGES ON CASH ( 170) ( 592)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 73,974 ( 50,048)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 142,730 85,346
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $216,704 $35,298
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted
against current and long-term maturities:
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
(Dollars in thousands)
<S> <C> <C>
Current $ 3,931 $ 3,729
Long-term 12,215 9,707
$16,146 $13,436
</TABLE>
2. Lines of Credit
As of June 30, 1995, the Company had a $50.0 million unsecured bank
line of credit with various interest rate options available to the Company.
The line of credit is available for funding operations and to facilitate
standby letters of credit. The Company is charged a nominal fee on amounts
used against the line as security for letters of credit. Funds available
under this line are reduced by any amounts used as security for letters of
credit. At June 30, 1995, $48.0 was available under this line of credit.
IGT-Australia had a $3,440,000 (Australian) bank line of credit
available as of June 30, 1995. Interest is paid at the lender's reference
rate plus 1%. This line is secured by equitable mortgages, and has a
provision for review and renewal annually in May. At June 30, 1995, no
funds were drawn under this line.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Notes Payable
Senior Notes
In September 1994, the Company completed a $100,000,000 private
placement of 7.84% Senior Notes (the "Senior Notes"). The Senior Notes
require annual principal payments of $14.3 million commencing in September
1998 through 2003 and a final principal payment of $14.2 million in
September 2004. Interest is paid quarterly. The Senior Notes contain
covenants which limit the financial commitments the Company may make and
require the maintenance of a minimum level of consolidated net worth. The
net proceeds from the Senior Notes of $99.6 million are being used to
finance the construction of a new manufacturing and headquarters facility
and for general corporate purposes.
Australian Cash Advance Facility
In August 1994, the Company was advanced $18,000,000 (Australian),
from an Australian bank under a cash advance facility. Annual principal
payments (Australian) are $3,000,000, $6,000,000, $6,000,000 and $3,000,000
at September 30, 1995, 1996, 1997, and June 30, 1998, respectively.
Interest is paid quarterly in arrears at a blended rate comprised of fixed
and floating rates. The proceeds of the loan were used to acquire
manufacturing and administrative facilities in Sydney, Australia.
4. Construction of New Corporate Headquarters and Manufacturing Facility
In May 1994, the Company purchased a 78 acre site in Reno Nevada for
approximately $6.0 million for the construction of an approximately 900,000
square foot office, manufacturing and warehousing facility. Currently the
manufacturing and warehousing facilities are under construction with an
estimated completion date of January 1, 1996. The office facilities are in
the design phase and are scheduled to be completed during the first quarter
of fiscal 1997, absent unexpected delays. Total estimated construction cost
is $73 million.
5. Income Taxes
The provision for income taxes is computed on pre-tax income reported
in the financial statements. The provision differs from income taxes
currently payable because certain items of income and expense are
recognized in different periods for financial statement and tax return
purposes.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts, contracts, and notes receivable. The Company
maintains cash and cash equivalents with various financial institutions in
amounts, which at times, may be in excess of the FDIC insurance limits.
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a portion
of its products through third party distributors resulting in significant
distributor receivables. At June 30, 1995 accounts, contracts, and notes
receivable by region as a percentage of total receivables are as follows:
<TABLE>
<S> <C>
Nevada 36.0%
Riverboats (greater Mississippi River area) 28.1%
Colorado 8.9%
Native American Casinos (distributor) 5.7%
Louisiana (distributor) 2.6%
Other Regions (individually less than 5%) 18.7%
Total 100.0%
</TABLE>
Effective September 30, 1993, the Company sold its equity ownership
interest in CMS-International ("CMS") to Summit Casinos-Nevada, Inc.
("Summit"), whose owners include senior management of CMS. The Company
remains as guarantor on certain indebtedness of CMS, which had at June 30,
1995 an aggregate balance of $16.4 million. The notes that have been
guaranteed are also collateralized by the respective casino properties.
Summit has agreed to indemnify and hold the Company harmless against any
liability arising under these guarantees. Management believes the
likelihood of losses relating to these guarantees is remote.
7. Stock Repurchase
A stock repurchase program was originally authorized by the Board of
Directors in October 1989. This repurchase program was most recently
reaffirmed in February 1994 and currently allows for the purchase of up to
24 million shares. During the current fiscal year, the Company purchased
3,767,150 shares of its own outstanding stock for a total of $50.6 million
in cash. As of June 30, 1995, the Company has purchased a total of 17.8
million shares (adjusted for stock splits) under this repurchase program.
8. Investment in Radica
During February 1994, the Company purchased 9.2% of Radica Games
Limited ("Radica") for cash of $5,850,000 and 374,436 shares of the
Company's common stock, valued upon issuance at $10,250,000. Radica is a
Hong Kong corporation which designs, develops, manufactures, and
distributes non-gaming casino theme games. The Company accounts for its
noncurrent investment in Radica at the lower of cost or market, based on
quoted market prices. At June 30, 1995, the Company recorded an unrealized
loss on this investment of $6 million, net of tax, as a separate component
of stockholders' equity.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Dividends
On May 5, 1995, the Board of Directors declared a quarterly cash
dividend of $.03 per share, payable on September 1, 1995 to shareholders of
record at the close of business on August 1, 1995. At June 30, 1995, the
Company had accrued $3.9 million for this dividend.
10. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows.
The tax benefit of stock options totaled $1.6 million and $4.8 million
for the nine months ended June 30, 1995 and 1994, respectively.
In May 1991, the Company completed a $115,000,000 public offering of 5
1/2% Convertible Subordinated Notes (the "Notes") maturing June 1, 2001. At
the option of the holder, the Notes were convertible into common stock of
the Company. During the nine months ended June 30, 1994, notes with a face
amount of $72,180,000 were converted to 9,338,877 shares of the Company's
common stock. All the Notes were converted as of May 31, 1994.
During the nine months ended June 30, 1995, unrealized losses on
investments, net of taxes totaling $1.7 million were recorded as
"Unrealized Losses on Investments" in stockholder's equity. See Note 8.
At June 30, 1995 and 1994, the Company had accrued $3.9 million and
$4.0 million, respectively, for dividends declared but not yet paid. These
accruals resulted in an increase in accrued expenses and a decrease in
retained earnings.
Payments of interest for the nine months ended June 30, 1995 and 1994
were $15.3 million and $9.3 million, respectively. Payments for income
taxes for the first nine months of fiscal 1995 and 1994 were $66.5 million
and $63.6 million, respectively.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1995
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1994
Net income for the three months ended June 30, 1995 was $25.4 million
or $.20 per fully diluted share versus $39.9 million or $.30 per fully
diluted share for the three months ended June 30, 1994.
Revenues and Cost of Sales
Total revenues for the third quarter of fiscal 1995 were $150.8
million, a 20% decline from the same prior year period. This decline
resulted from a 34% decrease in product sales partially offset by a 31%
increase in game operations revenue.
Product sales totaled $97.3 million and $146.9 million for the
quarters ended June 30, 1995 and 1994, respectively. The decline in
product sales revenue is attributable to a lower gaming machine unit sales
volume. The Company sold 18,100 machines during the third quarter of 1995
in comparison to 26,800 units sold in the same period in 1994. The Company
sold more gaming machines during the third quarter of last year than in any
other quarter in its history as a result of the large number of new casino
openings in North America. While there are fewer new casino openings in
the current year, third quarter product revenue reflected sales to new
casino openings including the Silver Legacy Resort Casino in Reno, Nevada,
the Texas Gambling Hall Hotel Casino in Las Vegas, Nevada, Players Island
Resort in Mesquite, Nevada, the Sheraton in Halifax, Nova Scotia, and the
new Casino Magic property in Greece.
Revenue from game operations was $53.5 million for the third quarter,
a 31% increase over revenues of $40.8 million in the prior year period.
This growth is attributable to the expansion of the Company's linked
progressive systems in Louisiana and Native American jurisdictions along
with the introduction of the three-reel games Dollars Deluxe and Quarters
Deluxe in Mississippi, Nevada and New Jersey. The Company currently
operates over 8,300 machines on 37 different systems in nine jurisdictions.
The gross margin on product sales revenue was 44% and 48% for the
three months ended June 30, 1995 and 1994, respectively. This decline is
attributable to higher per unit costs associated with lower production
levels. The Company anticipates improvement in the product sales gross
margin as a result of efforts to align costs with product output and
improve operating efficiencies. Gross profit on gaming operations revenue
was 50% and 57% for the third quarter of 1995 and 1994, respectively. This
decrease relates to an increase of the cost of interest sensitive annuities
the Company purchases to fund jackpot payments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Expenses
Selling, general and administrative expenses were $19.6 million for
the third quarter of fiscal 1995 versus $18.8 million for the same prior
year period. This increase is a result of slightly higher legal expenses
and other costs associated with the establishment and maintenance of
additional foreign offices. Research and development expenses totaled $7.1
million for the quarter, an increase of 15% over the prior year period.
This increase relates to the costs of additional engineering personnel.
The Company devotes substantial resources in this area to continue the
development of new gaming products and progressive systems technology.
Depreciation and amortization expense was $7.1 million and $5.1
million for the third quarter of fiscal 1995 and 1994, respectively. This
increase is primarily due to depreciation recorded on assets acquired in
the prior twelve months. These additions include manufacturing and
administrative equipment and a new manufacturing and office facility in
Australia, which replaced a leased facility. Acceleration of depreciation
on existing leasehold improvements in response to the construction of a new
manufacturing and office facility in Reno (see Note 4 to the Consolidated
Financial Statements) has also contributed to the increase.
Other income and expense
Interest income increased $3 million to $10.2 million for the quarter
ended June 30, 1995. This improvement was due, in part, to higher average
balances and higher interest rates on the Company's notes and contracts
receivable. Additionally, the growth in progressive systems resulted in
increased income producing investments to fund future jackpot payments.
Interest expense totaled $4.8 million and $2.8 million for the third
quarter of fiscal 1995 and 1994, respectively. This increase resulted, in
part, from additional interest expense associated with the growth in
jackpot liabilities. Interest incurred on additional borrowings made by
the Company in late fiscal 1994 (see Note 3 to the Consolidated Financial
Statements) also contributed to the increase. Interest savings on the
conversion from October 1993 through May 1994 of the Convertible
Subordinated Notes into common stock of the Company partially offset the
above increases.
Gain (loss) on the sale of assets resulted in a gain of $292,000 and a
loss of $2 million for the three months ended June 30, 1995 and 1994,
respectively. In the prior period, the cost basis of the portfolio was
greater than market by $2.5 million, resulting in the recognition of an
unrealized loss. As of June 30, 1995, the cost basis of the portfolio was
lower than market as a result of the overall improvement of investment
values in comparison to the prior year period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - NINE MONTHS ENDED JUNE 30, 1995
COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1994
Net income for the nine months ended June 30, 1995 was $74 million or
$.56 per fully diluted share versus $101.7 million or $.76 per fully
diluted share.
Revenues and Cost of Sales
Total revenues were $460 million and $502 million for the first nine
months of fiscal 1995 and 1944, respectively. Product sales declined 19%,
partially offset by a 28% growth in game operations revenue.
Product sales totaled $313.2 million and $387.3 million for the nine
months ended June 30, 1995 and 1994, respectively. The decline in product
sales resulted from lower machine unit sales volume. The Company sold
55,800 machines during the period compared to 71,400 machines in the same
prior year period. A general decline in new casino openings throughout
North America negatively impacted product sales during the current period.
Sales during the nine months were positively impacted by increased sales in
New Jersey, Colorado, and jurisdictions throughout Europe as well as the
new casino openings mentioned in the discussion of revenues for the third
quarter.
Revenues from gaming operations increased $32.1 million or 28% to a
total of $146.8 million as a result of the expansion of the Company's
linked progressive systems. The installed progressive system machine base
has increased 30% over the prior year period. The introduction of systems
in Louisiana and Native American markets along with new games in the
established system markets of Mississippi, Nevada, and New Jersey account
for the increase.
The gross margin on product sales was 43% and 47% for the nine months
ended June 30, 1995 and 1994, respectively. In an effort to reduce
finished goods inventory and as a result of lower unit sales, production
levels were lowered, which resulted in higher production costs per unit.
The gross margin on game operations was 53% and 55% for the first nine
months of fiscal 1995 and 1994, respectively. This decrease relates to an
increase of the cost of interest sensitive annuities the Company purchases
to fund jackpot payments.
Expenses
Selling, general and administrative expenses totaled $63.8 million for
the nine months ended June 30, 1995 versus $58.6 million for the comparable
prior year period. This increase is attributable to increased personnel
and administrative costs associated with additional employees throughout
the Company. The costs of opening and maintaining additional foreign
offices also contributed to this increase. Research and development
expenses were $21.4 million for the first nine months of fiscal 1995, an
increase of $6 million. This increase is a result of additional
engineering personnel. The Company devotes substantial resources in this
area to continue the development of new gaming products and progressive
systems.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Expenses (continued)
Depreciation and amortization expense totaled $20.2 million for the
current period, an increase of 41% over the first nine months of fiscal
1994. Higher fixed asset balances and accelerated depreciation on
leasehold improvements contributed to this increase. Asset acquisitions
over the past year include manufacturing and administrative equipment and
the purchase of a new manufacturing and office facility in Australia to
replace a leased facility. Leasehold improvement depreciation has been
accelerated for those facilities which will no longer be used when the new
manufacturing facility is completed (see Note 4 to the Consolidated
Financial Statements).
Other Income and expense
Interest income was $28.7 million for the first nine months of fiscal
1995 versus $21.1 million for the comparable prior year period. Interest
income earned on the Company's notes and contracts receivable grew due to
increases in the average balances of the receivables and higher interest
rates. Interest income from investments to fund jackpot liabilities also
increased. Growth in progressive systems play resulted in increased income-
producing investments to fund future jackpot payments.
Interest expense increased $6.7 million to $15.2 million for the nine
months ended June 30, 1995. Increased interest expense associated with the
growth in jackpot liabilities contributed to the overall growth in interest
expense. The Company also incurred interest on additional borrowings made
in late fiscal 1994 (see Note 3 to the Consolidated Financial Statements).
During the prior year period, the Company incurred interest expense on the
Convertible Subordinated Notes which were converted to common stock of the
Company as of May 1994, resulting in interest savings which partially
offset the increases discussed above.
The gain (loss) on the sale of assets resulted in a loss of $890,000
and a gain of $101,000 for the nine months ended June 30, 1995 and 1994,
respectively. Realized losses on the sale of securities totaled $885,000
for the current period. Realized gains on the sale of investments in the
prior year period were $2.8 million, partially offset by unrealized losses
of $2.5 million resulting from market declines of the Company's investment
portfolio.
WORKING CAPITAL AND CASH FLOW
During the nine months ended June 30, 1995, working capital increased
$12 million. This increase in working capital resulted from an increase of
$74.0 million in cash and cash equivalents. This growth was partially
offset by the following fluctuations. Efforts to lower overall inventory
levels resulted in a $28.7 million decrease in inventories. Short-term
investments decreased $19.0 million. Accounts receivable decreased $17
million as a result of reduced revenues. Accrued employee benefit plan
liabilities decreased $9.3 million due to payment of a portion of these
incentives.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
WORKING CAPITAL AND CASH FLOW, (continued)
During the nine months ended June 30, 1995, the Company generated cash
from operating activities of $125.2 million. Declines in inventories and
receivables contributed to cash from operating activities The reduction in
accrued and deferred income taxes payable lowered cash from operating
activities.
This operating cash increase was offset by cash used in investing and
financing activities of $39.6 million and $11.4 million, respectively.
Cash used by investing activities related primarily to purchases of fixed
assets and investments to fund jackpot liabilities. Purchases of short-
term investments were more than offset by the sales proceeds of short-term
investments. Cash used by financing activities included treasury stock
purchases totaling $50.6 million and dividend payments of $11.8 million.
LINES OF CREDIT
As of June 30, 1995, the Company had a $50.0 million unsecured bank
line of credit with various interest rate options available to the Company.
The line of credit is available for funding operations and to facilitate
standby letters of credit. The Company is charged a nominal fee on amounts
used against the line as security for letters of credit. Funds available
under this line are reduced by any amounts used as security for letters of
credit. At June 30, 1995, $48.0 million was available under this line of
credit.
IGT-Australia had a $3,440,000 (Australian) bank line of credit
available as of June 30, 1995. Interest is paid at the lender's reference
rate plus 1%. This line is secured by equitable mortgages, and has a
provision for review and renewal annually in May. At June 30, 1995, no
funds were drawn under this line.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Marketable Securities," effective as of
October 1, 1994. There was no material effect on the Company's financial
statements due to the adoption of this statement.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: August 11, 1995
INTERNATIONAL GAME TECHNOLOGY
By: /s/ Scott Shackelton
Scott Shackelton
Vice President
Corporate Controller
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